This Week in Barrons - 6-30-13

This Week in Barrons – 6-30-2013

This Time it could be Different.

During a question and answer session a week ago, The Ben Bernanke hinted that he wouldn't mind seeing QE start to taper off later in the year, and maybe end in 2014.  While he didn't make a single actual move, the markets all around the world reacted violently.  I personally do NOT believe QE will end.  If the mere mention of it ending tosses the market around for hundreds of points, and pushes bond yields up so fast (the likes of which we’ve never seen before) – what would happen if they really did end it?  The results would be catastrophic.  The ‘wealth effect’ would be gone.  The ‘wealth effect’ comes from seeing asset prices rice, and realizing (if you own those types of assets) that you are implicitly wealthier than before.  The ‘wealth effect’ causes people to feel better and therefore, spend money on things that they don’t need – with (potentially) money that they don’t have.

Can you imagine what would happen if the Fed stopped pushing $85B per month into the economy?  To quote Peter Schiff:  “Although Bernanke dodged the question in his press conference, the Fed has broken the normal market for mortgage backed securities (MBS).  While it's true that the Fed only owns 14% of all outstanding MBS’s, it is by far the largest purchaser of newly issued mortgage debt.  If the Fed were no longer buying, there are not enough private buyers to soak up the issuance.  Those who do remain would certainly expect higher yields.  To put it bluntly, rates would increase dramatically if there would be any mortgage market at all.”  The ‘wealth effect’ would then work in reverse: spending, confidence and home prices will fall, foreclosures and unemployment will rise, and we will be in a recession even before the Fed begins to taper.

Ah, but remember those words ‘budget deficit?’  Well if we are spending a huge amount each year to service our debts in a ‘zero interest rate policy’ world, how are we going to service them with rates increasing dramatically?  Our national debt would soar once again.  The Fed has built an economy based on the Fed.  Our Federal Reserve System has gone from hiding in the shadows, to being our masters.  In the 60's and even into the late 70's, you based your investing on the economic growth of the economy and the individual companies that were sharing in that growth.  You watched corporate expenses and profits and you loaned them your money because you felt that they'd use it wisely, and return both a dividend and possibly some capital appreciation.  Today that notion is as old fashioned as curing you with leeches.  Today we don’t care about earnings, revenues, or marking assets to market; but rather all we care about is the Federal Reserve and if they will keep rates artificially low. 

Which brings up the question: What is the Fed's next move?  What ever it is, it has to be a change from what they're doing because the current path simply isn’t working.  But let’s not forget, the Fed doesn't work in a vacuum, but rather works with other Central bankers from other nations on a total agenda.  So, what is that agenda?  I think Gold is telling us that agenda.  I know this will sound somewhat cloak and dagger – but as the title suggests – this time it could be different.  This time we're not talking about a few trillion dollars in debt between a few nations.  This time we are talking hundreds of trillions in debts, and inflating the money simply won’t catch-up with all the debts that need to be paid.  There needs to be a bigger, bolder plan. 

My guess is that when Asia gets enough gold to make a stand with their currency, they're going to call for a global ‘reset’.  I think that all of the major currencies and nations will be called upon to enter into some form of Bretton Woods type of plan - where everyone resigns debts and we all issue a new global reserve currency.  It appears that this currency will require some metal backing.  If you think about it like that, you can make some sense out of the incredible attacks on Gold.  In the 30's when they wanted to re-price dollars, they passed a law making it mandatory that everyone turn in their gold.  It was the largest confiscation of wealth on record.  Well, instead of having people turn in their gold – what if they get all that they need by reducing the paper price and chasing people away from investing in it?  We’re seeing a massive move of gold to Asia.  It feels like this coordinated attack on the metals is being done to allow the Asians the opportunity to amass enough gold that when they pull the plug on dollars, everyone can meet at the table with enough physical gold that a new standard can be issued.  I think the agenda is to allow the major nations the ability to obtain the physical metal, and then cut free of the current system of reserve dollars. 

I might be crazy, but no amount of money printing is going to cure the debts.  The EU is all but bankrupt.  The US cannot mathematically pay off its debts.  China is slowly admitting to building several unsustainable bubbles.  Japan is a nightmare.  But it’s different this time.  This isn't one nation struggling – like Argentina.  These are the major economies of the planet dying in debt.  No amount of inflating the money supply will take away the ills of the world’s current overactive debt problem.  Gold’s message is that nations need to obtain it.

But there is one catch – there is not enough physical gold to be purchased.  When gold was rising in price – people were buying it.  When gold is falling in price – people are buying it.  Why does it take 7 years to give back Germany's gold?  They first must find enough of it to ‘give back’.  So this time could be different.  We could be looking at a global currency reset.  How it all plays out – I’m not certain, but it is the most logical path. 

The Market....

Ever since Bernanke chatted about wanting to taper QE this year, and end QE next year – just about everything has sold off.  I’ve consistently said that they can’t end QE because if they do, we crash.  But what if the debts are so enormous and the possibility of inflating our way out so impossible – that once all the nations have enough gold, they will:

-       Back away from the stimulus.

-       Let things crash.

-       Rebuild from the ashes.

-       Write off the debts.

-       And introduce a new global reserve currency? 

That is a hard pill to swallow.  All Central bankers have ever known is to continue to print more money, and to inflate away problems.  But since this isn't just one single country, and the debts aren't just a few trillion, can it actually be that they're going to give up?  Is that why The Ben Bernanke is so hot on the idea of him leaving?  He made his life’s work about what the depression experts did wrong, and he said that he could solve a similar situation.  Maybe he just wants out before they do indeed yank the plug on the whole darn system. 

If that is the ‘final solution’, then we are in a whole new ball game.  Don't get me wrong; I’m not there – yet.  I think it is something to ponder, and dissect into its component parts.  But if that becomes the case:

-       We would become deflationary.

-       Economic activity would slow to a crawl.

-       Prices would crash because no one would buy anything.

-       Stocks would fall below 2008 levels.

-       It would be the "Greater Depression".

If however they are going to continue on the printing press bandwagon, then the situation remains relatively the same.  They continue to print, stocks hold up or even rise, and the distortions become even larger.

Stocks have entered what looks to be their first significant correction since November of last year.  From the May highs we've drifted sideways and down, and the volume on the down days far exceeds the volume on the up days.  At our lowest point we had about a 6.2% correction – the deepest of the year.  We then ran back up and tried to get over the 50-day moving averages in the big indexes, but it wasn't to be.  Thursday’s close was not above them, and Friday slid back another 115 DOW points.  Last week I thought that we'd rally back up, test the 50-day moving averages, and if we failed to break through them, we would drift down again.  If I'm right about that scenario, what should happen is that we fade back down and re-test the 14,650 area.  If that area doesn't hold, we could see a real 10% pull back (something new this year) and a long way down.

In a very strange twist, the only sector showing incredible strength on Friday was the gold and silver miners.  All in all, the key word (especially for the “long only” investor) is to please be careful.  This market could easily break in either direction.  Earnings season is fast approaching, and it isn't going to be pretty.  They will have to do a lot of spin to try and make these upcoming earnings look acceptable.  In any event, listen for the Fed heads talking about QE, and try not to get too involved long or short.  Volatility will rule the week. 

Tips:

My current short-term holds are:

-       SIL – in at 24.51 (currently 11.72) – no stop

-       GLD (ETF for Gold) – in at 158.28, (currently 119.21) – no stop ($1,223.80 per physical ounce), AND

-       SLV (ETF for Silver) – in at 28.3 (currently 19.07) – no stop ($19.50 per physical ounce).

To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm. 

Please be safe out there! 

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